The End of the Social Media ETF Nightmare?

While social media has been an extremely weak sector as of late, some metrics may be starting to come down to more reasonable levels.

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Apparently, the minute before the Facebook (FB) IPO was the high-water mark for the broad social media industry, at least so far in 2012. After that horrendous opening session for the social media giant, the bottom appeared to fall out of the space, not just in the networking segment, but in various other social media companies as well.

Firms like Zynga (ZNGA) and Groupon (GRPN) have also succumbed to the panic and are now trading at or near 52 week lows, suggesting a broad level of disinterest in this once investor darling corner of the market. Now, many other IPOs in the segment are also being put on the back-burner, as more companies wait for a more friendly time to debut their shares out to the general public.

This negative trend has been especially devastating to one of the only funds to target the space, the Global X Social Media Index ETF (SOCL). The fund debuted in November 2011 and appeared to be perfectly timed to take advantage of the social media boom and the increased investor interest in the space.

Initially, this was certainly the case as the ETF was one of the most discussed products and was well on its way to a solid asset base. Yet despite doing a great job of investing in a variety of social media firms from around the globe, and being one of the few funds to have a decent holding in Facebook, the product still has less than $20 million in AUM as of right now as interest in the space has evaporated seemingly overnight.

While investor curiosity over social media stocks has certainly waned after the lackluster Facebook IPO, the real reason for investor hate is undoubtedly due to the weak performance. In the past three month period, SOCL has lost about 8.6% including a roughly 10.6% slump in July alone. With such a rough track record for the broad space it isn't that surprising to see that many investors have abandoned the segment for the time being.

However, the past few sessions have witnessed something of a reversal in the space, with many stocks and SOCL coming off of their lows. In fact, SOCL has added close to 5.3% in the first third of August, helping to cut deeply into the fund's longer term losses.
Investors should also note that thanks to the recent performances of many stocks in the sector, the cream of the crop now accounts for some of the biggest holding percentages in the fund, while a number of other large caps also occupy some of the top spots, suggesting less volatility could be in the cards for SOCL in the near future.

For example, LinkedIn (LNKD) currently accounts for just over 12.2% of the fund, making in the top component in SOCL. While much of this gain has been thanks to a recent earnings report, the company is still up over 64% year-to-date, implying a relatively long time frame of outperformance.

Beyond this leader, SOCL also includes a nearly 5.7% allocation to Google (GOOG), while it has just under 4% combined in the increasingly weak duo of Zynga and Groupon. While a large reason for their small holding percentages is clearly due to their terrible performances, this small weight could be great news for those who are thinking about getting in now and want low levels of exposure to these uncertain companies.

So while social media has been an extremely weak sector as of late, some metrics may be starting to come down to more reasonable levels, especially since some companies have now proven to be winners in the market.

Furthermore, given the recent bout of strength in SOCL, which decisively moved the fund off of its all-time lows, we may have witnessed a near-term bottom for the fund, making now an interesting entry point for investors with a long time horizon, a desire for broad social exposure, and the willingness to take on significant risk.

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